By David Parmenter
- Eliminate all wasteful month-end processes by using ‘Post-It sticker’ reengineering
- Get the CEO’s support
- Set rules for the finance team so all members will sing from the same song sheet
- Ban spring cleaning and catch adjustments in an “Overs and Unders” Schedule
- Avoid a Huge Wave of Accounts Payable Invoices at Month-End so you can close the AP ledger and accruals by 5pm day-1
- Avoid late intercompany warfare at month-end
- Early Closing-Off of Accounts Receivable
- Close off capital expenditure and run depreciation calculation before month-end
- Early Inventory Cutoff
- Replace Monthly Reforecasting of Year-End with quarterly rolling forecasting
- Deliver a flash result to the CEO at 5pm of the first working day
- Ban All Late Changes to the Month-End Report
- Comment on variances at category level not at account code level
- Lock-in quality assurance steps (checking internal consistency + the two person read through)
- Embracing Kaizen (set a goal of 10 innovations per year for every finance team member)
1. Eliminate all wasteful month-end processes by using ‘Post-It sticker’ reengineering
Re-engineering processes can be a complex and expensive task or a relatively easy one: the choice is yours. The Post-it sticker process is explained in my “Winning CFO” book and I will send you the extract if you send me an email.
Abandonment is the key to a lean month-end. The act of abandonment gives a tremendous sense of relief to a team for it stops the past from haunting the future. Knowing when to abandon and having the courage to do so are important in the adoption of lean month-end processes.
2.Get the CEO’s support
For any change to occur we need to get the CEO to go into ‘bat for us’. The CEO needs to make it career limiting not to conform to month-end processes rather than being seen as a badge of honour. To get the CEO motivated, do a brief calculation on the costs of month-end reporting, then approach the CEO.
3. Set rules for the finance team so all members will sing from the same song sheet
Accountants are all artists: we sculpt a month-end result and there is no such thing as a ‘right’ number, only a ‘true and fair ‘number. The finance team need to realise that there is no perfect number. They should only do enough to arrive at a ‘true and fair’ view.
4. Ban spring cleaning and catch adjustments in a spreadsheet
Month-end reporting is not the time for spring cleaning, no matter how tempting it may be. This discipline requires a re-education within the finance team and with budget holders. One of the most important practices is to catch all material adjustments in an ‘overs and unders’ spreadsheet that traps major adjustments – say, over £5,000, £20,000 or £50,000, depending on the size of the organisation. In many months you will not need to process any adjustments as the net impact is immaterial on the P/L.
5. Avoid a Huge Wave of Accounts Payable Invoices at Month-End so you can close the AP ledger and accruals by 5pm day-1
The last thing the AP team needs is to receive a tsunami of invoices on the last day of cut-off. It is important to push processing back from the end of the month by avoiding a payment run at month-end. It is better practice to have weekly or daily direct credit payment runs with none happening within two days of month end.
If the AP is held open after month-end, you will find it difficult to complete prompt month-end reporting. What is the benefit of holding open AP for one or two days? We could hold the accounts payable open for six months after month-end and still not get the plumber’s invoice that arrives when they are doing their year-end and realise they have forgotten to invoice for work done.
6. Avoid late intercompany warfare at month-end
Clever organisations ban all inter-company adjustments at month-end except for major internal profit adjustments. Larger groups have intercompany software where the transaction is posted simultaneously in both general ledgers.
7. Early closing-off of accounts receivable (AR)
Immediately close off AR on the last working day or, better still, noon on the last working day, with sales in the afternoon carried forward to the first day of the new month. Closing off earlier may be required for an organisation where the sales representatives make a lot of sales on the last working day of the month .e.g. car dealers.
8. Close off capital expenditure and run depreciation calculation before month-end
Why perform depreciation calculations at month-end when clever organisations do so much earlier? They close off capital projects at least one week before month-end.
9. Early inventory cut-off
If the last day of the month’s production is delaying your month-end, make the inventory cut-off at the close of business on day –2 with all production on the last day being carried forward to the next month. This gives one day to check the valuation and records.
10. Replace Monthly Reforecasting of Year-End with quarterly rolling forecasting
Monthly forecasting is too costly and creates ‘number noise’. The benefits are only worth the effort if there are large fluctuations in the major drivers – an airline, for example, would adjust monthly for passenger numbers and fuel costs.
11. Deliver a flash result to the CEO at 5pm of the first working day
Issue a flash result on the profit and loss statement (P/L) bottom-line to the CEO by the close of the first working day, stating a level of accuracy (e.g., +/–5%, +/–10%). Five to seven lines is normally enough for a flash report. Never attempt a flash report until the AP, AR and accrual cutoffs have been successfully moved back to the last working day of the month.
12. Ban all late changes to the Month-End Report
Once the reporting pack is prepared, allow no adjustments unless they are very material. There is nothing worse for the finance team than to submit a finance report to the CEO that is internally inconsistent. This is frequently caused by a late change not being processed properly through the report.
13. Comment on variances at category level not at account code level
Budgets should be set at a category level rather than at the account code level. Budgeting at a detailed level does not lead to a better prediction of the future. Looking at the detail does not help you see the future any better ; in fact, it tends to screen you from the obvious.
14. Lock-in quality assurance steps (checking internal consistency + the two person read through)
Check the report for internal consistency
For every number that appears elsewhere in the report – either in the text, a table or a graph – write the page reference where it appears again and initial to indicate you have checked the number in the subsequent page. Readers who have been in an audit team will most likely have used this quality assurance process.
Perform a two person read-back of the report
Ask another person, who has not worked on the report, to read it aloud to you (the writer). By hearing the words, read to you, you will be able to improve the grammar and make it an easier read. If the reader has difficulties understanding any of it, I can assure you the CEO will as well.
Look for the two gremlins in the report
In every piece of work there are always at least two gremlins that manage to sneak through. If I find them and they are of minor importance, I leave them and release the report. If you do not find them, then look again – or someone else will spot them.
15. Embracing Kaizen (set a goal of 10 innovations per year for every finance team member)
One thing that sets Toyota apart from nearly all organisations is Toyota’s focus on continuous improvement. Every employee is expected to ask themselves each day ‘What could I do better tomorrow?’ and come up with at least one innovation per month, no matter how small. The Toyota average, internationally, is 10 innovations per employee per year.
For more information, please purchase Fast close: A Guide to Rapid Month-end and Year-end Reporting- Toolkit (Whitepaper + e-templates)